Political noise has been on the rise in developed markets in recent years, bringing what are regarded as the more stable economies in line with emerging markets.
Though it can hardly be ignored, political noise is often hard to trade. In this note, we examine one of the more disruptive political events in a democracy, presidential impeachment.
Elements in the US have called for the impeachment of current president Donald Trump for a range of reasons.
We can offer no view on the validity of these charges, but we can look at past US presidential impeachments as a guide to what might happen to the markets.
Happily for the US, the incidence of impeachment is limited, with only three impeachment attempts since the founding of the republic (Andrew Johnson, Richard Nixon, and Bill Clinton).
Consequently, we also consider more recent examples from Brazil and South Korea, where impeachment was successful.
Do markets react when presidents are impeached?
At first glance there appears to be no obvious pattern.
We find weak, rather than compelling, evidence that impeachment leads to higher volatility, though the evidence is stronger in periods where quantitative easing was not active.
Presidential impeachments are also associated variously with weaker, stronger and indifferent asset market performance.
However, less superficially, we can link the impact on market performance to expectations of policy change resulting from an impeachment.
Where the perception is that a government’s policies are damaging the economy, the possibility of a change in government boosts asset performance, as in Brazil.
However, where a government is seen as benefitting the economy, or at least doing no harm, the prospect of an end to that policy set can induce market jitters.
We might read market reaction to events around President Clinton as an example of this, particular given the rally following his acquittal.
Of course, this can be as much due to the removal of uncertainty as a seal of approval on government policy.
What should investors consider?
Investors concerned about how to trade similar political events could therefore consider two key questions.
First, what is the likely direction of policy if an impeachment attempt (or similar) is successful?
Second, how likely is success of such an attempt? Though this might seem obvious, sticking to these simple guidelines can provide clarity when one might otherwise drown in market noise.
The full version of this article “The impact of presidential impeachment on markets” is available for download. Please note, this is written for professional investors, and is not suitable for retail investors.